As I put my year-end thoughts in a condensed post Revisiting 2018, a dear friend, Gaurav asked me about the performance of the stocks which had been put forth over the last 6 months. This post is about my stock performance evaluation (Who likes exam results, after all?)
Couple of things before we proceed, below are the 3 broad timeless principles which has bode well (last 6 months included!!)
- As Howard Marks, one of the investing legends said: “Investing is a negative art”, if you are able to filter the ones or exclude the ones which you don’t wont in your portfolio, what would be left would be good or great.
- Time plays a very important factor in investing – What I mean is not ‘timing’, i.e. trying to time the market, but time duration or waiting period. If the investment were to be held for a long-term, despite some oscillations along the way, it becomes friend of a good business.
- ‘Suno sabki, karo apni’ – “Listen to all, however, do you own homework’. You are advised to conduct your own independent research into individual stocks or industries before making any decision.
Below are the companies which were mentioned, primarily from an anti-selection or exclusion perspective, some of them on multiple occasions!
Quotational Loss = Buying Opportunity? posted on July 22, 2018 highlighted about Tata Motors “I would refrain from catching the “falling knife”, unless it really starts building a franchise. After all, I would not buy a dilapidated house, just because it is available cheap. Would you? (The stock is down 32.5% since July 22 till date)
Excluding losers help!!
52-Week High – Awful Reference Point? posted on Nov 4, 2018 provided evaluation of Tata Motors to be done on an Absolute Basis, rather than basis a reference point. Chances of loss of such a gargantuan nature could have been avoided. (Stock down 10.2% since then.)
Being profitable is hardly the evidence of a good business posted on Aug 19, 2918 again highlighted Tata Motors’ Negative Cash Flows + Dependence on Capital + Meagre Return on Capital employed. (Stock down 3.4% since then.)
New India Assurance, GIC, SBI Life, HDFC Standard Life & ICICI Lombard:
Insurance – Underwriting at what cost? posted on Aug 22, 2018 highlighted some of the behavioural perils of the insurance industry, viz. Incentive caused bias + Everyone doing it + Inability to sit calm + Information Overload Fallacy + Low Barriers to Entry + Inability to sustain large performance variation. After all, Underwriting risks prudently is the key to long-term success in the industry, despite insurance being large and underpenetrated.
All the stocks above are down since Aug 22, 2018, barring ICICI Lombard: up 15.7%, New India Assurance: down 25.5%, General Insurance Corpn: down 21%, SBI Life: down 9.2%, HDFC Standard Life: down 14.6%
Investing is indeed a negative art!!! – More stocks got excluded than included during the last 6 months (anti-selection!!)
Dish TV, Leel Electronics, Cimmco:
Recommended by Experts, Invert please!! posted on Nov 4, 2018 highlighted on doing one’s work and how by answering some of the basic fundamental questions would have avoided disaster. All the captioned stocks are down (Dish TV: down 8.1%, Leel Electronics: down 24.7% and Cimmco: 20.8% since published)
Train to notice what one sees – Jet Airways fiasco!!! Posted on August 12, 2018 highlighted the importance of understanding reality – how things are and what works and not. To understand reality, it is important to get a long-term view of the business. After all, the company didn’t have pricing power, long-term profitability has been Negative most years, average ROI 1.2% p.a. and no control on raw materials. (6.2% down since then. From January 2018 until Aug 12, 2018, the stock was already down by 70%)
Now, lets look at some of the fundamentally strong companies which were talked about during the course of the year. Fortunately, the “timing” was correct, since all the stocks barring one mentioned moved either up or remained stable. However, one needs to note that circumstances, both internal and external and market price need to be evaluated regularly.
Avenue Supermart – DMart:
D-Mart Vs Future Group: Observations posted on Oct 28, 2018 highlighted D-Mart’s humility and understanding their circle of competence around their limitation of understanding both investors’ and e-commerce instils transparency, in sharp contrast with Future Group. Also, D-Mart’s long-term focus itself enables them to own their store as compared to shut and move approach of Future Group, thereby enabling them to save on high rentals as compared to Future Group. (DMart: up by 28.5% and Future Retail down by 6.4% since then.)
DMart – Saturating the Circle posted on Sept 23, 2018 highlighted about growth over time. Saturating the Circle” approach is the key determinant to the success of the company. Rather than sprinkling too thin across the country, it makes sense to build economies of scale from a regional perspective gradually and over time. Since retail is a low-margin high volume business, efficiencies around cost can only be built if one is able to saturate the circle over time. (Stock up by 4.9% since Sept 23, 2018 till date.)
How my stint at HDFC Bank taught me some Important Investing Lessons posted onOct 21, 2018 provided some important Investing lessons, wherein the1st lesson was: What you don’t do is more important than what you do? 2nd Lesson being: Costs matter and 3rd Lesson of investing which I learnt was: Discipline and patience pays off! (Stock up by 7.7% since Oct 21, 2018 till date)
Maruti: Pyramid Business Model – Reason for success!!! posted on Oct 14, 2018 highlighted about how Maruti, by following the Pyramid Business Model approach became the undisputed leader of the Indian passenger car market. A true pyramid is a business model in which lower-priced products are manufactured and sold with so much efficiency that it is virtually impossible for a competitor to steal market share by under-pricing the product or the service; hence the lowest tier of the pyramid is known as the firewall. (The stock is up 5.5% up since Oct 14, 2018 till date – Love the business model!!!)
Atul Auto: ‘David’ of the 3-wheeler Industry posted on Dec 3, 2018 highlighted how Atul Auto has been able to able to operate profitably in an industry, where the largest competitor is 15 times larger. One of the key reasons for this has been its ability to raise prices, without any loss in the volume of business – which makes it a great business. Also, capital requirement has been minimal, thereby leading to ever-increasing stream of earnings. (Stock up by 8.3% since Dec 3, 2018)
High-priced stocks: Where is the denominator? posted on Sept 9, 2018 highlighted about Bajaj Auto which has had an average Return on Equity at 44% since the last 10 years, without the use of leverage, average net profit and free cash flow of approximately INR 3,000 crs and INR 3,200 crores yearly respectively since the last 10 years is at least economically sound; i.e. its underlying / denominator is in place. (Stock price has remained at the same level since then, see an upside though)
Mgmt > Biz Economics: Are you kidding? posted on Nov 18, 2018 highlighted why it is better to invest in companies wherein the underlying economics of the business is robust, and it is not dependent upon the management. Eicher Group which previously had 15 businesses including tractors, trucks, motorcycles, components, footwear and garments, none of which being a market leader, focused on 2 promising businesses – Motorcycles and tractors and sold the remaining 13 businesses. It has sold the tractor business as well. (Stock price down by 18.5% since then.)
Mr. Market’s mood swings at times provide great opportunities for bargain buys for some stocks. At times, this bargain may prevail for a long time (and at times) forever.
Interglobe Aviation (‘Indigo’):
Aviation: Hyper-competitiveness @ loving it!! posted on Dec 9, 2018 highlighted how the current stress in the aviation market and the hyper-competitiveness would result in few airline companies getting some pricing power eventually, provided they eliminate the temptation to make people airborne at any price, thereby making some of them profitable once again. (Stock up 11.8% since then)
Overall, anti-selection and selection of stocks both, worked at least in the last 6 months at least to my satisfaction!!
Hope to pass. Now, over to you, Gaurav!!
Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.